Entrepreneurship theory process practice 8e by kuratko 8e ch 11

Part III
Developing the
Entrepreneurial Plan

CHAPTER

11

Financial
Preparation for
Entrepreneurial
Ventures
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All rights reserved.

PowerPoint
PowerPoint Presentation
Presentation by
by Charlie
Charlie Cook
Cook
The
The University
University of
of West
West Alabama
Alabama


Chapter Objectives
1.

To explain the principal financial statements
needed for any entrepreneurial venture: the
balance sheet, income statement, and cashflow statement

2.

To outline the process of preparing an
operating budget

3.

To discuss the nature of cash flow and to
explain how to draw up such a document

4.

To describe how pro forma statements are
prepared

5.

To explain how capital budgeting can be used
in the decision-making process

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Cengage Learning. All rights reserved.

11–2

Chapter Objectives
6.

To illustrate how to use break-even analysis

7.

To describe ratio analysis and illustrate the
use of some of the important measures and
their meanings

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Cengage Learning. All rights reserved.

11–3


The Importance of Financial Information
for Entrepreneurs
• Significant Information for Financial

Management





The importance of ratio analysis in planning
Techniques and uses of projected financial statements

Techniques and approaches for designing a cash-flow
schedule
Techniques and approaches for evaluating the capital
budget

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Cengage Learning. All rights reserved.

11–4


Understanding the Key Financial
Statements
• Balance Sheet


Represents the financial condition of a company at a
certain date.
• It details the items the company owns (assets) and the
amount the company owes (liabilities).
• It also shows the net worth of the company and its liquidity.



Assets = Liabilities + Owners’ Equity
• An asset is something of value the business owns.
– Current and fixed assets

• Liabilities are the claims creditors have against the company.
– Short- and long-term debt

• Owners’ equity is the residual interest of the firm’s owners in
the company.
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a part of
Cengage Learning. All rights reserved.

11–5


Table

11.2

Kendon Corporation Balance Sheet for the Year Ended

December 31, 2010

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Cengage Learning. All rights reserved.

11–6


Understanding the Key Financial
Statements (cont’d)
• Income Statement


Commonly referred to as the P&L (profit and loss)
statement from activities of the firm.



Provides the results of the firm’s operations.

• Income Statement Categories


Revenues: gross sales for the period



Expenses: Costs of producing goods or services



Net Income: The excess (deficit) of revenues over
expenses (profit or loss)

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11–7


Table

11.3

Kendon Corporation Income Statement for the Year Ended

December 31, 2010

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Cengage Learning. All rights reserved.

11–8


Understanding the Key Financial
Statements (cont’d)
• Statement of Cash Flow


An analysis of the cash availability and cash needs of
the business that shows the effects of a company’s
operating, investing, and financing activities on its
cash balance.
•
•
•
•



How much cash did the firm generate from operations?
How did the firm finance fixed capital expenditures?
How much new debt did the firm add?
Was cash from operations sufficient to finance fixed asset
purchases?

The use of a cash budget may be the best approach
for an entrepreneur starting up a venture.

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Cengage Learning. All rights reserved.

11–9


Table

11.4

Format of Statement of Cash Flows

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11–10


Preparing Financial Budgets
• Budget


One of the most powerful tools the entrepreneur can
use in planning financial operations.

• Operating Budget

 A statement of estimated income and expenses over a
specified period of time.
• Cash Budget


A statement of estimated cash receipts and
expenditures over a specified period of time.

• Capital Budget
 The plan for expenditures on assets with returns
expected to last beyond one year.
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11–11


The Operating Budget
• Sales Forecasting
 Creating an operating budget through preparation of
the sales forecast.
• Forecasting



Linear regression: a statistical forecasting technique.
Y = a + bx
• Y is a dependent variable—its value is dependent on the
values of a, b, and x.
• x is an independent variable that is not dependent on any of

the other variables
• a is a constant.
• b is the slope of the line of correlation (the change in Y
divided by the change in x).

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11–12


Figure

11.1

Regression Analysis

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11–13


Table

11.5

North Central Scientific: Sales Forecast for 2010

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11–14


Table

North Central Scientific: Purchase Requirements
Budget for 2010
11.6

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Cengage Learning. All rights reserved.

11–15


Table

Dynamic Manufacturing: Production Budget
Worksheet for 2010
11.7

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11–16


The Cash-Flow Budget

• Cash-Flow Budget
 Provides an overview of the cash inflows and outflows
during the period. By pinpointing cash problems in
advance, management can make the necessary
financing arrangements.
• Preparation of the cash-flow budget
 Identification and timing of three cash inflows:
•
•
•


Cash sales
Cash payments received on account
Loan proceeds

Minimum cash balance

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11–17


Table

11.8

North Central Scientific: Expense and Operating

Budgets
In order to identify the behavior of the different expense accounts, John Wheatman
decided to analyze the past five years’ income statements. Following are the results of
his analysis:
• Rent is a constant expense and is expected to remain the same during the next
year.
• Payroll expense changes in proportion to sales, because the more sales the store
has, the more people it must hire to meet increased consumer demands.
• Utilities are expected to remain relatively constant during the budget period.
• Taxes are based primarily on sales and payroll and are therefore considered a
variable expense.
• Supplies will vary in proportion to sales. This is because most of the supplies will be
used to support sales.
• Repairs are relatively stable and are a fixed expense. John has maintenance
contracts on the equipment in the store, and the cost is not scheduled to rise during
the budget period.

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Cengage Learning. All rights reserved.

11–18


Table

North Central Scientific: Expense and Operating
Budgets (cont’d)
11.8

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Cengage Learning. All rights reserved.

11–19


Table

11.9

North Central Scientific: Cash-Flow Budget

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11–20


Pro Forma Statements
• Pro Forma Statements
 Are projections of a firm’s financial position over a
future period (pro forma income statement) or on a
future date (pro forma balance sheet).
 Using beginning balance sheet balances, they depict
projected changes on the operating and cash-flow
budgets which are added to create projected balance
sheet totals.

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11–21


Table

11.10

North Central Scientific: Pro Forma Statements

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11–22


Table

11.10

North Central Scientific: Pro Forma Statements

(cont’d)

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11–23


Capital Budgeting

• The Capital Budgeting Process
 Identification of cash inflows or returns and their timing
• The inflows are equal to net operating income before
deduction of payments to financing sources but after
deduction of applicable taxes and with depreciation added
back, as represented by the following formula:
Expected Returns = X(1 – T) + Depreciation
– X is equal to the net operating income
– T is defined as the appropriate tax rate

• Capital Budgeting Objectives
 Which of several mutually exclusive projects should
be selected?
 How many projects, in total, should be selected?
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11–24


Table

North Central Scientific: Expected Return
Worksheet
11.11

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11–25